Protecting Intellectual Property in China

Intellectual property protection is the No. 1 challenge for multinational corporations operating in China. According to the U.S. government, China accounted for nearly 80% of all IP thefts from U.S.- headquartered organizations in 2013, causing an estimated $300 billion in lost business. For European manufacturers, the loss of IP in China reduced potential profits by 20%. The effects from IP leakage are visible in counterfeited items including toys, luxury goods and automotive and aircraft parts. But IP violations go beyond products to include pirated operational processes and entire business and service models. For many multinational corporations, IP leakage becomes a barrier to integrating Chinese sites and partners into global activities. IP leakage frequently occurs through staff transfers or shared practices from foreign multinationals to local joint ventures or supply chain partners. For multinationals, this type of IP leakage is often a calculated risk worth taking. However, unintended IP leakage can affect a company's reputation and profitability, and can create powerful local or even global competitors. In studying more than 50 multinational corporations, authors Andreas Schotter and Mary Teagarden identified nine IP protection practices for use in China. Four of the practices are defensive and externally focused; the others are proactive and internal. Together, they create what the authors call the "IP protection web," which allows corporations to (1) expand faster within China and in other emerging markets; (2) improve performance; and (3) enhance local and global innovativeness. Most of the companies the authors studied learned to protect their IP through trial and error. The changing composition of IP risk creates a need for ongoing reconfiguration. Indeed, as Chinese companies become more skillful at absorbing leaked IP, international companies must develop more sophisticated responses and develop new ways to engender loyalty.

• International business